Consumers are used to a generous product return policy online. Companies recognize that it makes the purchase decision easier. However, most companies limit this policy to standard products and custom products are generally non-returnable. In this article, the authors argue that this is a mistake. Extending simple returns to custom products will encourage consumers to become more involved with the brand and will also reduce the likelihood of returns. This will result in more loyal customers and higher profits. The authors also examined the conditions under which companies can expect a win-win outcome from a flexible return policy for custom-made products. Four factors appear to be critical: making customized products more salvageable; applying technical innovations that reduce the costs of customization; reducing or eliminating adjustment costs; and providing improved, user-friendly interfaces.
Product returns are booming. According to the National Retail Foundation, consumers returned about $430 billion worth of merchandise to retailers in 2020 — about 11% of total U.S. retail sales. Returns from online purchases are particularly high at 30% on average, doubling since 2019 due to the increase in online shopping during the Covid-19 pandemic.
The high volume is primarily due to the widespread use of lenient returns by businesses – they recognize that consumers are more willing to buy a product if they know they can return it if the product doesn’t meet their expectations. For online transactions, a flexible returns policy is even more important, as consumers cannot touch and feel the product before purchasing it. Returns are nowadays seen as a necessary expense to do business.
However, this leniency has generally been limited to standard products. It has not expanded to custom-made products, which have become an increasingly important part of the permanent offer. Consumers can choose the base color of their jeans at Levi’s, the body material of their guitars at Fender, or have their names engraved on their baseball bats at Marucci Sports, but products like these are usually not easy to return.
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A few companies are bucking that trend. Take a look at the different approaches from Nike and New Balance, both of which sell a variety of standard shoe models and offer options to customize some of them so that consumers can choose colors for different parts of the shoe and add engraved text. The two companies have similar return policies for standard products, in that they both allow returns for a full refund of the sale price. But while Nike states that “you can return items within 60 days for any reason. These include custom Nike By You sneakers,” New Balance’s policy states that “non-returnable items also include custom shoes.”
So who’s right?
We studied this question in a recent research paper titled “Customization and Returns” (appearing in Management Science) and found that the principle of a lenient return policy for standard products and strict for customization is generally correct. However, that approach misses an important factor that companies could also consider.
Standard products are obviously easier to resell than custom products (who would buy a product with a different name stitched on it?) and cost less to produce. It makes sense to return them easily. But these are not the only factors to take into account: the volume of the return is also important. Companies offering custom products report a 40% drop in their returns.
This happens for two reasons. For starters, consumers learn what they really want by interacting with the customization engines – and as a result, the end product is more likely to meet their needs. Sephora, for example, offers its customers the opportunity to virtually try makeup products to see which one fits best. Moreover, customization is akin to co-creating products between the company and the consumer, creating an ‘attachment’ to the company that further reduces the chances of a refund.
We found that these behavioral nudges not only increase the demand for products in general, but also encourage consumers to move from buying standard products to buying custom products. Instead of buying standard products and returning them at high rates, consumers customize them and then return them at much lower rates. Companies with a flexible return policy for custom products can, under certain circumstances, benefit from both increased sales (due to leniency) and an overall lower return (due to the lower perceived customer risk of customization) — a win-win outcome .
Achieve a win-win result.
We examined the conditions under which we could expect a win-win outcome from a flexible returns policy for custom-made products. Four factors seem crucial:
Make custom products more salvageable.
This would reduce the net cost of a return and can be achieved by changing the product design or finding secondary markets for returned products. For example, Nike sells returned shoes, standard or custom, at some of its Nike stores in the United States and has plans to expand this service to more locations. Big Data and AI-driven solutions can also help, for example to find consumers whose color preferences and even initials match those of a returned custom product.
Applying technical innovations that reduce the costs of customization.
Advanced manufacturing technologies, such as robotics and 3D printing, have reduced the cost difference between producing a custom and a standard product. For example, the Italian brand XYZ Bag created a collection of handbags, called “DADA”, which can be completely customized at a low price thanks to the use of 3D printing. Mass customization is widespread these days; it refers to the ability of companies to produce large quantities of customized products without sacrificing the efficiency of mass production. As such, companies have some leeway to adjust the price premium for custom products, which in turn would attract more consumers to customize them.
Reducing or eliminating adjustment costs.
Many companies charge an adjustment fee and change it regularly to find the optimal value. Given the potential to reduce ROI through customization, companies may want to consider reducing or even eliminating customization costs to encourage customers to adapt. Nike and Apple Watch are two examples of companies doing this.
Provides improved, user-friendly interfaces.
Finally, companies could improve the customization process, allowing consumers to learn about their preferences, reveal them to the company and love their purchase before it arrives. A successful customization interface uses high-quality 3D graphics and allows customers to gradually disclose the customization features. For example, Rimowa indicates the adaptable parts of the luggage directly on the image: wheels, handle and label. By clicking on each of these components, the consumer opens the corresponding configurator and can customize that specific component.
Thanks to the incredible technological advances in production and logistics, companies are able to offer customized products on a large scale. But that convenience also turns traditional thinking about returns on its head. As our work shows, allowing customers to return custom products can encourage them to move from standard products with a higher return rate to custom products with a lower return rate, which could both increase profits and could reduce efficiency.
This post Why you should allow returns on custom products was original published at “https://hbr.org/2022/03/why-you-should-allow-returns-on-customized-products”
